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Chinese hedge fund managers in focus: Chinese hedge fund managers are rushing to reassure investors following a downturn in small-value stocks, amidst increased regulatory scrutiny aimed at revitalising the country’s struggling stock markets.
Firms like High-Flyer Quant Investment and Baiont Quant, utilising quantitative strategies based on mathematical and statistical methods, have communicated with investors this week to address their recent performance issues and pledge to strengthen risk management.
These letters, verified by Reuters, come as Chinese quant funds, reliant on data-driven computer models, face major exposure to small-cap stocks that began plummeting in early February, sparking panic-selling and causing many quant products to lose over 15 per cent of their value within a week.
However, the $260 billion sector, as estimated by UBS, now confronts tighter regulatory oversight.
China’s stock exchanges announced this week that quant fund giant Lingjun Investment had violated trading rules and imposed a three-day ban on its buying and selling activities.
UBS highlighted the precarious position of onshore quant funds, citing severe losses, liquidation pressure, and heightened regulatory scrutiny.
Any reduction in fund size or trading activity could potentially impact market liquidity, particularly for small caps.
Although China’s mid- and big-cap stocks rebounded earlier this month, driven by suspected state intervention, this triggered a sell-off in small-caps, exacerbating a liquidity crisis in a segment heavily reliant on quant funds.
High-Flyer, in a letter to investors, attributed its recent setbacks to strategies ill-equipped for “extreme” market conditions, particularly the sell-off in small-caps accelerated by state support for larger stocks.
Baiont Quant, employing AI in investment, also faced significant drawdowns amid the market turmoil but assured clients of the effectiveness of its strategies once the current crisis subsides.
Liangdao Fund acknowledged the role of AI-driven models in exacerbating boom-and-bust cycles in China’s small-cap stocks and has implemented a dynamic risk identification system in response.
Quant funds also confront regulatory headwinds, with Shanghai and Shenzhen exchanges announcing increased monitoring of quant funds and high-frequency traders.
Tang Yu, a former partner at a major Chinese quant fund, suggested that industry consolidation could help mitigate market risks, as some leading quant funds have become too large.
In the short term, some investors may withdraw funds from quant funds to observe the regulatory landscape’s evolution.
(With Reuters Inputs)
